MANAGING PRIVATE EQUITY OR VENTURE CAPITAL INVESTORS IS A CRITICAL ART TO LEARN
I often use the adage that the only way into a relationship with private equity investors is via lawyers and the only way out is via lawyers. That in itself should give a strong clue as to what lies ahead.
Private equity investors have only one mission and that’s to make returns for their investors. They take their role and responsibilities very seriously and you are best advised to adopt this mission as your own. Investors don’t like lifestyle businesses and if there’s even a sniff that your business is becoming one, you will quickly learn how they feel about it. They use other people’s money from sources such as our pension funds and thankfully they are very protective of it. They expect you to be the same.
Even this basic scene setting is enough to indicate the need for some very attentive management of the relationship. Investors will want to be fully in the picture on progress with the business and will want to hear how things are going against plan. They will want to understand and be appraised on the finances but they will also wish to track implementation of programmes and initiatives in detail. Communicating well about these things with your investors is extremely important.
The chairman has an important role in managing the communication and relationship with investors but it’s important to understand that executive management play a key role too and the considerable work and effort in doing so has to be high up in priorities.
Communication with investors will take numerous forms. Sometimes it’s just a telephone call to ask you how a particular event has gone or how things are going generally. Other times will be more formal with the production of a monthly Board report and by way of a full presentation revue in a board meeting.
Board meetings are the main update window for investors and in many ways it’s a mental snapshot in time where investors will assess management’s performance and continued investability. You are therefore well advised to go into board meetings armed to the teeth with well contextualised information about performance and implementation progress.
Don’t become complacent by the day to day affability of investors. They will surely turn on you if they feel you are a risk to their and their clients’ money. Your job as executives is to deliver on the promises in your business and investment plans and to maintain investor confidence that you are doing the right things. This isn’t achieved easily. It comes from a big commitment to make quality preparations for board meetings.
One of my chief executives at the very early stages of working with him used to write up his board report and circulate it ahead of the board meeting. When the board assembled he would look across the table and ask investors if there were any questions. The investors would then start to poke through the report looking for questions to ask – finger prodding around spreadsheets and suchlike! This lead to frustration on both sides because the CEO’s report at the Board meeting was without context. I soon put a stop to that. I had the CEO produce a proper well-articulated set of presentation slides which took investors step by step through the points that were important for them to know and interject with. The board meetings were transformed.
It needs to be remembered that the board reports and Board presentations put together by the executives will go back for discussion among the investor partners and other investment committee members. Executives won’t be present at those meetings and the documents are the representation of the executive team. It is therefore in the interests of the executives that the Board documents work hard for them at investor meetings. This requires high quality articulation and this in itself involves a lot of work in preparing. Spending the time on this pays dividends and can save your political life. Don’t ever underestimate its importance.
Investors are generally a gentlemanly lot. They are of exceptional intellect and add a lot of value even when working from outside of the business. If you get frustrated with them and treat them with any form of disdain, it’s only going to inflame and turn out bad for you.
I have on occasions had to step into a relationship warzone between investors and management. I asked one of my CEOs why when he screwed up, the investors would come down on him like a ton of bricks yet if I made mistakes, they would rush round and help. I explained it was because they liked me and didn’t like him. He put special effort from that point to be less antagonistic towards his investors.
The message is, to be polite and unemotional at all times with investors and have empathy with their side of the table. Treating investors with the respect they deserve, keeping them well informed and ensuring their fullest understanding of performance and progress, goes a long way towards achieving and maintaining investor confidence in you. They are much more likely to rally round and help when the chips are down, when you have taken great care in the management of them as well as the business.
More will follow on this important subject soon.
THE PRIVATE EQUITY INVESTMENT PROCESS
THE CHAIRMAN ROLE IN A PRIVATE EQUITY INVESTMENT FIRM